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Daily Newsletter, Monday, 02/04/2002

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The Option Investor Newsletter Monday 02-04-2002
Copyright 2001, All rights reserved. 1 of 2
Redistribution in any form strictly prohibited.
Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP (view in courier font for table alignment)
*******************************************************************
02-04-2002 High Low Volume Advance/Decline
DJIA 9687.09 -220.17 9905.46 9677.54 1.45 bln 937/2200
NASDAQ 1855.53 - 55.71 1907.58 1849.13 1.77 bln 956/2644
S&P 100 553.43 - 15.92 569.35 552.05 Totals 1893/4844
S&P 500 1094.44 - 27.76 1122.20 1092.25
RUS 2000 470.09 - 9.95 480.08 469.44
DJ TRANS 2711.24 - 48.09 2759.92 2700.58
VIX 26.85 + 3.98 26.94 23.99
VXN 45.85 + 2.77 45.86 43.89
TRIN 2.81
Put/Call 0.89
*******************************************************************
The Battle Cry Goes Out. . .
By Buzz Lynn
buzz@OptionInvestor.com
Short every rally!!! At least that's the trading picture. But
what about the long-term investor? Yep, long-termers too ought
not to get too comfortable that there's a monster bailout rally
coming. But oh, what a target-rich environment for those with no
bullish market bias. Put nuggets are everywhere to be found if
only investors would ditch their bias. In the long-term, this is
a bear market until proven otherwise.
In the short term, call it "Enronitis", as the media has chosen to
do. I mention it often but opaque accounting practices cleverly
disguised as the innocuous-sounding "pro-forma" earnings will not
disappear overnight, and they will continue to cause heartburn in
the investment community. If you try to pet a rattlesnake, odds
of it biting you are pretty good. The tendency is then to be
leery of all snakes. Much like Maslow's law that says, "When you
are a hammer, everything tends to look like a nail", everything
now tends to look like an accounting snake. Gopher Snake or
Cobra, the market makes no distinctions.
For those few who think that the market will make the distinction
soon, I would disagree. Very few will educate themselves to the
distinctions, and those who do will have a difficult time getting
the financial information they seek. If they are successful,
having the accounting forensics background necessary to make that
distinction will make the position of sidekick to "The Crocodile
Hunter" a safer endeavor.
In short, there is not way to tell, even for the most
sophisticated of investors, without hours of research that don't
always' yield the answer before it's too late. Let companies that
postpone earnings announcements to rework the books, or companies
that disclose they made $4 bln in previously UN-disclosed
acquisitions be our guides. Surprises will happen every day on
that from because all that is information that has been
intentionally withheld from public scrutiny. It is impossible to
know stuff about companies that they do not want us to know. That
fear of getting bit will keep investors away from stocks,
reasonable or not.
More to the point, those surprises will continue with new ones
disclosed or uncovered every day. Such is the nature of a bear
market.
But don't despair. The past does not equal the future. All we
need do is the same as hockey great, Wayne Gretzky. Instead of
skating to where the puck is (or worse, has been), skate to where
the puck is going. There is no need to lament the passing of the
bull, dead for nearly two years now, as long as the future holds
so much promise for put nuggets. Be a market agnostic and get on
the right side of the trade. As is so often stated in these
pages, the market is not right or wrong. It just IS. Skate to
where the market leads us and profit. Or skate to where you WANT
the market to go and bust out.
Big picture: recognize the bear for what it is. Profit from
knowing that it is the greater trend.
Great, Buzz. "So how do I trade it?" Glad you asked. Even
though Fundamentals Guy, dominates my personality, Fundamentals
Guy would be dead without Chart Boy, the tactician of the two who
puts practical application to timing entry and exit. So what do
the charts say?
Dow Industrial chart (INDU - weekly/daily/60/30):
Starting with the Dow, we've noted for some time in this column
that 9712 was pivotal as a point of support/resistance. Looks
like the 50-dma (magenta) and the 20-dma has composed primary
resistance over the last three sessions though. Support? Who
knows? But with a weakening in daily stochastics, as the 5-period
makes a wobbly-kneed attempt at overbought and the candles falter,
doesn't exactly suggest any level of support is ironclad. True
enough, the 9700 fell again today. However, for those brave
enough to scalp calls, the 60/30 stochastic setup is bottoming
while the candles are in no-man's land with the meaningful support
at 9550. That candles have hit lower Bollinger band extremes too.
But as can be judged by the 30-min chart, lower Bollinger has done
nothing for the bulls lately. A better high odds entry awaits
those put players who wait for the 60/30 stochastics to cycle to
overbought, then short the rally.
Relatively speaking, the Dow is in better shape than the broader
index SPX or NASDAQ thanks to a defensive component mix, which is
perceived as "safer" in this environment.
NASDAQ Composite (COMPX - weekly/daily/60/30):
The NASDAQ on the other hand has some serious chinks in the armor.
It closed at a new low today since its November breakout, and its
daily stochastic has just rolled over from its luke-warm rally to
midfield. While the 60/30 charts are oversold and begging for
upward release, the bigger weekly/daily trend will keep a limit on
upside action.
S&P 500 (SPX - weekly/daily/60/30):
Same thing for the SPX - a new closing low since November, with
wobbly stochastics perhaps ready to take a dive. Nonetheless,
they may have to wait for the oversold 60/30 charts to fake a
rally at the very least. While scalpers may be successful with
calls, the next high odds trade appears to be waiting for a put
opportunity with overbought short-term stochastics and the candles
at SPX 1100.
VIX? Highest close since December, which suggest that investors
are dumping calls in favor of puts. But at 26.85, the figure is
inconclusive. A healthy dose of accounting-born fear is entering
the market, but nothing should be gleaned from it as it is far
from extreme in either bullish or bearish territory.
And how about tomorrow? I haven't a clue. But here's how I get
my brain wrapped around current conditions. First, the bigger
trend is fundamentally down and the technical charts back that up.
That is the primary trend. Intermediate, the daily charts have
broken down with stochastic values rolling down with them, but not
convincingly bearish. Trading timeframes though suggest a
scalpers trading bounce could happen until oscillators reach to or
near overbought again. In short, no high-odds trade setups as of
the close tonight.
I can't imagine the news that would catalyze this, but a pop in
the first half hour with the SPX reaching to 1100 then rolling
under today's close would a pretty strong signal to go short. But
anything is possible.
Remember, when you hear analysts talk about the great day on the
trading floor and CNBC is bullish (for the day or the moment), the
market is shortable. We need only wait for inevitable failure to
make a bearish entry. Sure there will be trades in either
direction for the agile. But the primary trend is down. Short
every rally.
See you at the bell!
********************
INDEX TRADER SUMMARY
********************
Smell It In The Air
Austin Passamonte
Fear. That emotion is has become almost palpable in the markets.
Bulls who think fear is good, that a wall of worry is needed for
the next sustained rally to emerge may soon get what they seek.
Where major index price action is when that bullish reversal
happens may be an interesting story indeed.
(Weekly/Daily Charts: NWX)
A random example from the tech sector. Virtually all of them look
the same – just like this. Even biotechs that looked poised for a
bullish breakout soon shed plenty of ground today. Absolutely no
signs of any sustained upside move across any tech sector
whatsoever.
(Weekly/Daily Charts: XAU)
Gold fever is soaring, just like the precious metal stock sector.
What an impressive move in short period of time as scared money
rushes to safe haven during times of Wall Street uncertainty.
There could easily be a few more Tycos in the marketplace waiting
to be dragged from their closet, and almost no company is immune.
Not even John Chamber's mighty CSCO is above scrutiny for
imaginative accounting procedures and adjustment of PE values
going forward. Only time will tell, and in the end truth is always
exposed.
Conclusion
My personal trading plan has not changed one iota since New Year's
champagne flowed pink & bubbly: short every failed rally with
gusto. That worked immensely well today, last week, the week
before that and probably a few more weeks ahead of us as well.
When in doubt about which way to play, get short and ask questions
later while the trend remains decidedly down! Jim implores that
the trend is our friend and he's 110% right. Indeed we have a
strong one at our side right now, so ride the waves of success
while it's here.
(10/5 Min Charts: SPX)
A few OI readers played Swing Trade model puts off the open today
as drawn up in the weekend Gameplan section. Some of that terrific
move was wasted on a gap-down open and inflated premiums but there
was still plenty of potential gains to be had.
Conservative traders exited on the late-day failed bounce between
the red and green lines depicted above. That brief consolidation
made for a fine exit for modest gains, but many readers asked if
they shouldn't just jump right back into puts. While we do not
offer a live day trading service here, for those who wish to play
the fastest game in town we offer the above example.
Note how price action consolidated for 110 minutes (count the
candles on left within the flag) as stochastic values went
overbought in unison? Where was the trend? Down. Where were
longer-term chart signals pointing? Down. If that bear flag breaks
below the red line, get short. And indeed it did. Short the SPX at
1100 area offered 7+ index points worth of added bonus to a very
nice day already. Sat it out? Fine decision. Jumped back in?
worked in textbook fashion better than we could ever draw it up.
Summation
I'm just looking for the next reflexive rally to bounce these
markets and get short again. Buying puts near the open on a break
below today's lows should be good for a retest of last week's lows
from there. My fantasy tonight is an upward pop off the open that
fails near 10:00am and I get short right below the opening values.
Let's see what happens next.
Love these trends when they're here! Enjoy this while it lasts.
Best Trading Wishes,
austinp@OptionInvestor.com
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**************
Traders Corner
**************
Reader's Write and They're Right On!
By Mark Phillips
mphillips@OptionInvestor.com
Sometimes reader questions and requests converge perfectly with
my intended topic of discussion, and today was one of those days.
We've been talking for the past few weeks about a couple of
trading systems that I like for their simplicity and I promised
that this week I was going to try to tie them together along with
some additional confirming indicators. But I'm going to deviate
from that somewhat, as I got an email over the weekend that I
think really encapsulates what I'm trying to accomplish with this
series on different technical patterns and chart setups.
One of my regular readers sent the following email and I've
copied the text here for all to share. Then we can work through
the answer in what I think will be a very beneficial exercise.
Ready? Here goes!
"Hi Mark:
Thanks for your great article on volatility and LEAPS this
weekend. I am just beginning to learn about LEAPS and your
explanations are really helpful.
QUESTION: With all the writing lately about the use of
Stochastics, and think I am really getting a feel for them. So,
I am really curious about some of the call and put
recommendations that I go through lately. Now I know stochastics
aren't the only indicators which one can use to evaluate a
potential play -- I use the PnF (just learning for 4 months now),
MACD, and now your "ribbons". But on many recommendations, the
weekly/daily stochastics seem overbought on the calls and
oversold on the puts. This throws me a bit.
Examples: Calls: UPS, ASYT, DPMI, RATL
Puts: EBAY, AT, CCMP, VRSN
What am I missing? And how might I have confidence entering a
play, for example, on pullbacks or rollovers, that have the
weekly/daily stochastics oversold/overbought respectively.
My other question is "What should I look for to enter on momentum
or break-out (breakdown)? Volume, sector momentum?
Thanks for your advice! [S]"
Wow!! Thanks for the compliment and the great questions, which
I think are very timely. I'd be willing to bet that there are
more than a couple of readers that have asked themselves some of
the very same questions.
We know that there are probably almost as many trading approaches
as there are traders, and what looks like an excellent setup to
one trader would look like a recipe for disaster to another.
What I want to do is dissect a couple of the plays listed above
and see what the technical basis for the trades might be. If I
do this right, we can tie the discussion in with the Gap and
Ribbon system that we've been discussing, giving a glimpse at how
these systems can be used with other tools such as PnF charts,
trendlines, oscillators and volume to build a trading strategy
for an individual play.
Let's start off with RATL as a bullish example. While the stock
does not have a pretty, ascending trendline that it is riding
higher, the PnF chart is a thing of beauty. This is one of the
few stocks I've seen in the Technology sector that has not given
a single sell signal on the PnF chart since tracing its lows in
late September. It just continues to set new relative highs,
pull back to a higher low and then hit a new relative high.
The dip in late December is the only time in the past 4 months
that the daily Stochastics have entered oversold. Note that they
didn't stay there long, with the dip being a good entry point for
the next leg higher. A nice confirmation of this comes from the
volume picture. Notice that as the Stochastics is bottoming,
volume has really dried up, telling me that there just aren't a
lot of traders that want out. And why should they? The stock
is finding support right there at the highs from late November.
In early January, we get a bullish entry signal from the Ribbon
system that is followed by a quick run up to the $25 level before
consolidation sets in again. RATL has been following this
pattern for the past several months, and when we see a pattern
that repeats, we can profit from it. Then we got a Gap system
entry signal just over a week ago, as the gap up to the $24 level
remained unfilled after 2 days. Looks like a good bullish
signal, but there's a caveat. The price begins to weaken with
Stochastics failing to enter overbought territory. The key to
this behavior is what was happening at the same time in the
Software index (GSO.X) {Not Shown}. It was in the process of
pulling back to and testing the $180 support level. So we can
use the GSO as an additional indicator of whether our bullish
outlook for the stock still makes sense.
Move forward to the last candle shown on the chart and we can see
that the gap from 7 days ago has now been filled. That negates
the entry signal from the Gap system, but we can still be
cautiously bullish on the stock if it and the GSO can hold
support. Oops! A quick look at the GSO index shows that it
violated support today and that is a red flag that RATL's sector
is showing signs of weakness. So what to do?
I would personally stand aside from the play at this point,
because there just isn't a strong consensus for a bullish play
in RATL. Stochastics are heading down, the GSO broke support,
the gap has been filled, and the stock closed below the lower
moving average of the ribbon. Odds are not in favor of a bullish
play here, although it could still materialize. What we would
need is a reversal in the GSO to back above resistance, combined
with a volume-backed rebound in RATL from the vicinity of $23.
It could happen, but note that my initial premise for considering
the play (the unfilled gap) has been negated. Considering all
the evidence, I would let this play go. The other side of the
coin is that risk is easy to manage with an entry near $23
because we can place a stop at $22. A move below that level
would mean that RATL is not finding support at either the bottom
of the gap or recent support at $22, giving us a blaring warning
signal that the bull run may be over with.
All right, how about a play that is looking healthier? I picked
EBAY to the downside, because I like the technicals on this one
much better, especially for instructional purposes.
Back in mid-January, we got a gap down that 2 days later
remained unfilled. That's a clear entry signal to the downside
according to the Gap system, and did you notice that it is
confirmed with a simultaneous entry signal from the Ribbon
system? At that point, I would have taken an entry on any
failed rally below the $62 level and set my stop at $64. We got
several such opportunities over the next week, but I liked the
odds on 1/28 the best, as the daily Stochastics had recovered
significantly by that point, yet price was continuing to meander
sideways. No strength there, and even on that big gap open, the
price didn't come anywhere near tagging the upper moving average.
Then late last week, the bearish picture started looking even
better, as Stochastics were clearly flattening out, setting the
stage for a short-cycle reversal -- not even enough bullish
interest to get the oscillator close to overbought. Another
inherent sign of weakness. Add in the fact that EBAY was by
that time solidly beneath the $60 resistance level (prior
support) and I'm starting to have more conviction for a decent
downside move in the stock.
Lo and behold, that is precisely what happened today, and traders
that took entries last week or this morning are smiling right
now. So let's review what we had telling us this might be a
high odds play. Gap system entry signal, Ribbon system entry,
weakness in the Stochastics, broken support and just to make it
interesting, the Internet sector (INX.X) broke below its $125
support level on Friday. That's what I'm talking about when I
say look for confirmation. Everything I'm looking at tells me
that the bears are in charge on the stock, and taking a position
this morning was a high-odds proposition. Oh and by the way,
the PnF chart is on a sell signal with a bearish price target of
$46. This is the kind of alignment of multiple indicators that
I'm looking for before I put my hard-earned money at risk.
One final note on EBAY. The stock came to rest just above the
$55 support level, and could be subject to a bounce tomorrow
morning. If I was looking to play a breakdown below that level,
I would only do so if it came on strong volume and further
weakness in the INX. As [S] pointed out in his initial question,
for a momentum trade, we ideally want both sector momentum and
strong volume on our side.
All right, enough dissection of the plays for today. Here's
what I think is the important point to take away from all of
this. We each need to decide what tools we are going to use in
our trading and take only those trades that pass through that
initial filter. For instance, you may want to only play
overbought/oversold on the oscillators buying at support and
selling at resistance. Stick to that approach if it works for
you. Tools like PnF and the weekly charts will keep you on the
right side of the longer term trend, while the oscillators in
your chosen time frame should help you to identify optimal entry
points.
If momentum trading fits your style, then go that route. I just
don't think momentum trading is the best way to go in a market
that is so clearly rangebound. If you're going to trade
breakouts and breakdowns, you NEED to have those moves confirmed
by strong volume and momentum within the stock's particular
sector.
So if you see plays on the call and put list that don't look like
they are attractive based on YOUR trading criteria, then don't
trade them! As you get more educated and become more comfortable
with your own methodology, you should feel more comfortable
relying on your own abilities. That will give you the confidence
to rely on your own decisions, which in the long run always
results in better trading results.
Next week, I'm going to tie this up with one more example of an
attractive trade setup that leads to an entry. But we're going
to take a slightly different approach, as I think we need to tie
everything together with some guidance on managing risk with
stops. As Austin has pointed out numerous times, getting into
the play is the easy part. Getting out with a profit is where
the rubber meets the road, and we'll incorporate that aspect
into our strategy in our next visit.
Questions are always welcome!
Mark
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***********************
INDEX TRADER GAME PLANS
***********************
IS Swing Trade Model: Monday 2/04/2002
Chunks From The Middle Again
News & Notes:
------------
From weekend Summation commentary: "We are still tracking open put
plays in the QQQ and DJX indexes, but new put play triggers are
listed in all four targets for those who are flat right now. No
assurance any immediate market direction will ensue, but the
downside is heavily favored via chart prediction as of our
foresight tonight."
That worked just fine, as long puts from the open performed
admirably from the open to late in the session. What next? Let's
see:
Featured Markets:
----------------
[60/30-Min Chart: OEX]
The OEX is moving towards lower channel line of support near the
545 area. With intraday chart signals buried in oversold, the next
high-odds entry might be put plays on a pop up to or possibly
above the middle channel line (black) near 558 area and downside
failure from there.
[60/30-Min Chart: SPX]
For the SPX, 1100 area has become a short-term price magnet. If
the index pops to 1100 or higher and falls back thru 1098, I'd
test the downside from there in a hurry!
[60/30-Min Chart: QQQ]
QQQs are sitting inside their channel as well. A break below 36.50
would bring its 35 area into play in a hurry.
Summation:
---------
We do not have swing trade target parameters in place for tonight.
Consider using these patterns and levels noted above to enter
downside plays if resistance is tested and rejects price action
from there. Focus on channel lines and moving averages depicted
within: if price action fails up there as stochastic values
reverse near or within overbought extreme, that would be the ideal
setup we anticipate.
Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected
based on volume, open interest and "Delta" values in that order.
Our preference is usually OTM contracts except for the last few
days of expiration when ATM or ITM contracts are preferred.
Entry triggers are points where plays are tracked when price
action breaks above for calls or below for puts. Stops are the
exact opposite of that. Sell targets are points to exit based on
index levels or %gain on option contract price as noted.
*No entry targets listed mean the models are idle at that time.
New Play Targets:
----------------
QQQ DJX
Feb Calls: 38 (QQQ-BL) Feb Calls: 98 (DJV-BT)
Long: BREAK ABOVE none Long: BREAK ABOVE none
Stop: Break Below Stop: Break Below
Feb Puts: 37 (QQQ-NK) Feb Puts: 98 (DJV-NT)
Long: BREAK BELOW none Long: BREAK BELOW none
Stop: Break Above Stop: Break Above
=====
OEX SPX
Feb Calls: 570 (OEB-BN) Feb Calls: 1125 (SPT-BE)
Long: BREAK ABOVE none Long: BREAK ABOVE none
Stop: Break Below Stop: Break Below
Feb Puts: 560 (OEB-NL) Feb Puts: 1100 (SPQ-NO)
Long: BREAK BELOW none Long: BREAK BELOW none
Stop: Break Above Stop: Break Above
Open Plays:
----------
QQQ
Feb Puts: 37 (QQQ-NK)
Long: BREAK BELOW 38.00
Stop: Break Above 37.25 [hit]
DJX
Feb Puts: 98 (DJV-NT)
Long: BREAK BELOW 99.00
Stop: Break Above 97.50 [hit]
OEX
Feb Puts: 560 (OEB-NL)
Long: BREAK BELOW 572.00
Stop: Break Above 557.00 [hit]
SPX
Feb Puts: 1100 (SPQ-NO)
Long: BREAK BELOW 1129.00
Stop: Break Above 1101.00 [hit]
IS Position Trade Model: Monday 2/04/2002
Quickly Sliding
News & Notes:
------------
Major indexes continue the significant slides almost straight down
from bell to bell. Puts at the open would have enjoyed breathing
room right now.
Featured Plays:
--------------
None
Summation:
---------
The next relief bounce that holds into a close is probably a high-
odds put play entry. The trend is decidedly down, and we'll play
that way next available chance that arrives.
Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected
based on volume, open interest and "Delta" values in that order.
Position Trade model usually tracks OTM contracts with several
weeks of time premium left until expiration for buy & hold plays.
Entry triggers are points where plays are tracked when price
action breaks above for calls or below for puts. Stops are the
exact opposite of that.
*No entry targets listed means the model is idle at this time.
New Play Targets:
----------------
None
Open Plays:
----------
None
Sector Share Trade Model: Monday 2/04/2002
Down Again
News & Notes:
------------
Another favorable day for shorts and challenging day for longs. We
advanced trailed stops on short shares tracked that work and also
on long shares to reduce adverse risk.
Featured Plays:
--------------
(Daily/Hourly Charts: HHH)
Tracking the Internet HOLDR short from 34.00 is working fine as
this one continues to sink. We snugged up the stop to 30.00 just
in case it gets some wild ideas to pop higher from here: we'll
take our +11% or so off the table.
Summation:
---------
No new entries at this time, as we continue to manage current
plays tracked and await the next high-odds setup either way.
Trade Management:
----------------
Entry triggers are points where plays are tracked when price
action breaks above for calls or below for puts. Stops are the
exact opposite of that. Sell targets are points to exit based on
index levels or %gain on share price as noted.
No entry targets listed mean the model is idle at that time.
* Asterisk means stop-loss level changed since prior posting
New Play Targets:
----------------
None
Open Short Plays:
----------------
HHH Internet HOLDR
Short: BREAK BELOW 34.00
Stop: Break Above 30.00 *
SWH Software HOLDR
Short: BREAK BELOW 45.50
Stop: Break Above 45.00 *
IYV U.S. Internet
Short: BREAK BELOW 13.75
Stop: Break Above 13.50 *
Open Long Plays:
---------------
BBH Biotech HOLDR
Long: BREAK ABOVE 120.00
Stop: Break below 116.00 *
PPH Pharmaceutical HOLDR
Long: BREAK ABOVE 97.00
Stop: Break below 94.00 *
IYH Dow Jones U.S. Healthcare
Long: BREAK ABOVE 60.90
Stop: Break below 59.00 *
XLP Consumer Staples
Long: BREAK ABOVE 25.30
Stop: Break below 24.00 *
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The Option Investor Newsletter Monday 02-04-2002
Copyright 2001, All rights reserved. 2 of 2
Redistribution in any form strictly prohibited.
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EBAY - put
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GS - put
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PLAY OF THE DAY - PUT
*********************
GS – Goldman Sachs Group $82.50 -2.90 (-2.90 this week)
The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high
net-worth individuals. The company provides investment banking,
which includes financial advisory and underwriting, and trading
and principal investments, which includes fixed income, currency
and commodities, equities and principal investments. GS
recently completed the acquisition of Spear, Leeds & Kellog,
which is engaged in securities clearing, execution and market
making, both floor-based and off-floor.
Most Recent Write-Up
One of the hardest hit sectors in the market decline last week
was the Securities Broker/Dealer index, which got slammed for
more than a 5% loss on Tuesday, falling to its lowest level
since early December. That weakness persisted on Wednesday,
with the XBD falling right to the 38% retracement ($463.50) of
its September-December rally before finally catching a bid. Our
GS play went on a roller coaster ride with the XBD, falling as
low as $81.60 before bouncing with the rest of the markets and
giving nimble day-traders a quick profit. But GS hasn't been
able to keep pace with its sector, heading south on Friday, while
the XBD continued to advance. Make no mistake, the XBD is weak
relative to the broad market, and GS is demonstrating some
serious weakness relative to the XBD. Sounds like the perfect
recipe for a bearish play, don't you think? It is interesting
to note that on the rebound from the week's lows, GS was unable
to hold above the 200-dma ($86.78), and it appears this level
will act as resistance over the near term. Target failed rallies
near this level or even a bit higher near $88.50. On the
downside, new positions can be opened as the stock drops back
below $85, but watch out for another bounce near $82. Stops are
in place at $89.
Comments
In a continuation of its action last week, the Securities
Broker/Dealer index (XBD.X) got hit hard again on Monday,
shedding 3.25% and falling right to its 200-dma near $480
before catching a weak afternoon bounce. Actually, it
wasn't even a real bounce. The slide just paused a bit
before proceeding to break the 200-dma and close at the low
of the day. Leading the bearish party in the sector was MER
(losing close to 6% on the day), but our GS play wasn't far
behind, gapping down at the open and continuing to
deteriorate throughout the day, on volume well above the
ADV. While there is some support in the $82 area, there sure
isn't much bullish conviction that this level is going to hold.
And that makes sense with a bearish target from the PnF chart
near $78. With daily Stochastics beginning a short-cycle
reversal, it looks like we can continue to initiate new
positions on failed rallies at resistance, now in the $85-86
area. Move stops down to $87. Of course, a volume-backed move
below the $82 support level could now make for a decent momentum
trader's entry point as well.
*** February contracts expire in less than two weeks ***
BUY PUT FEB-85 GS-NQ OI=5249 at $4.00 SL=2.50
BUY PUT FEB-80 GS-NP OI=1954 at $1.60 SL=0.75
BUY PUT MAR-80*GS-OP OI= 384 at $3.20 SL=1.50
BUY PUT MAR-75 GS-OO OI= 373 at $1.70 SL=0.75
Average Daily Volume = 2.94 mln
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